How E-commerce is Disrupting the Grocery Supply Chain

As online sales continue to grow at an unprecedented pace, brick and mortart retailers continue to feel the pinch. Thousands of stores have closed while more online stores keep coming up each day. E-commerce has disrupted the retail markets to such an extent that it is now considered to be the new norm. The Grocery supply chain has also had its share of opportunities and challenges brought on by the growth of E-commerce.

The grocery retail industry is going through a period of upheaval; more and more people are opting for grocery delivery or curbside pickup. So, what are some of the specific effects of e-commerce on warehousing and the grocery supply chain?

Massive Growth in E-commerce Sales

Grocery sales have typically grown at a predictable rate, but thanks to exponential growth in internet use and online retailing, that rate is increasing. According to a BCG report on CPG supply chains, more than half the growth in grocery this year will come from e-commerce.

Grocers and suppliers are scrambling to perfect their online storefronts and fulfilment systems in order to maximize their share of the increase. True in all sectors, e-commerce fulfilment comes at a higher cost. This means increased near-term costs for technology upgrades are coupled with reduced margins in the already razor-thin grocery business.

Complexity of Logistics and Order Freshness

Groceries, unlike electronics and other goods, have a limited shelf life. When a customer places an order for groceries, the expectations often include same-day delivery of fresh, high-quality produce. This poses a problem for online grocers. In order to deliver the desired freshness, there is an immediate necessity to be able to deliver orders as fast as is possible while maintaining the quality of easily damaged fresh produce.

The challenges of buying groceries online are borne primarily by the supplier and the last-mile delivery arm in this case—fortunately, consumers are increasingly willing to pay a few extra dollars for the convenience.

Concerns such as shipping fees, the cost, and complexity of logistics, and the quality and freshness of produce mean that home delivery of groceries is still a nascent market currently accounting for about 3% of the US grocery business per FMI-Nielsen. E-commerce giants such as Amazon (who control 18% of grocery e-commerce in their own right) are grappling with the costs associated with expensive delivery infrastructure that have so far been an impediment to widespread penetration of e-commerce in the grocery supply chain.

Increasing Costs

As explained in this brief from Supply Chain Dive, Grocery suppliers already bear the majority of the cost of getting the product from manufacturing plants to storefronts. Growth in e-commerce means a greater number of delivery endpoints and increased utilization of freight and other shipping methods, driving those costs even higher. The CPG supply chain is currently facing pressure from retailer customers to make deliveries on time or face higher penalties than ever (Wal-Mart’s “must arrive by” date being a notable example).

Can grocery suppliers create a direct-to-consumer business arm to bypass the high costs and increasing compliance requirements of retailers? A McKinsey consultant explains that this would entail unlearning business processes built up over 50 years in operation, and reconfiguring supply chains away from delivery of pallets in favour of individual baskets. Such an undertaking would represent a tremendous cost, but we could see some manufacturers testing the waters.

In the nadir of online grocery sales, the suppliers who come out ahead will be the ones adept at consolidation and cost-reduction.

In summary, shopping habits are steadily evolving, and e-commerce is gaining traction. Grocery services will continue to head toward online platforms, all in the name of convenience. We will watch this evolution with great interest and continue to report on new trends in grocery supply, retail, and delivery.